Heuristics and Public Policy: Decision Making Under Bounded Rationality

83 Pages Posted: 20 Jun 2018 Last revised: 5 Jul 2018

Sanjit Dhami

University of Leicester

Ali al-Nowaihi

University of Leicester - Department of Economics

Cass R. Sunstein

Harvard Law School; Harvard University - Harvard Kennedy School (HKS)

Date Written: June 19, 2018

Abstract

How do human beings make decisions when, as the evidence indicates, the assumptions of the Bayesian rationality approach in economics do not hold? Do human beings optimize, or can they? Several decades of research have shown that people possess a toolkit of heuristics to make decisions under certainty, risk, subjective uncertainty, and true uncertainty (or Knightian uncertainty). We outline recent advances in knowledge about the use of heuristics and departures from Bayesian rationality, with particular emphasis on growing formalization of those departures, which add necessary precision. We also explore the relationship between bounded rationality and libertarian paternalism, or nudges, and show that some recent objections, founded on psychological work on the usefulness of certain heuristics, are based on serious misunderstandings.

Keywords: Heuristics, Biases, Bayesian Rationality, Ecological Rationality, True Uncertainty, Libertarian Paternalism, Behavioral and Experimental Economics, Behavioral Economics, Experimental Economics, Microeconomics

JEL Classification: D00, D01, D03, D90

Suggested Citation

Dhami, Sanjit and al-Nowaihi, Ali and Sunstein, Cass R., Heuristics and Public Policy: Decision Making Under Bounded Rationality (June 19, 2018). Available at SSRN: https://ssrn.com/abstract=3198739 or http://dx.doi.org/10.2139/ssrn.3198739

Sanjit Dhami

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

Ali Al-Nowaihi

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Cass R. Sunstein (Contact Author)

Harvard Law School ( email )

1575 Massachusetts Ave
Areeda Hall 225
Cambridge, MA 02138
United States
617-496-2291 (Phone)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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